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Minister of Trade, Industry and Energy Paik Un-gyu presides over a meeting to assess how South Korea’s real economy would be impacted by the US-China trade war on July 6 in Seoul. (provided by the Ministry of Trade, Industry and Energy)
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Worst-case scenario involves escalation into global trade war, resulting in decrease of economic growth
The spillover effect that the US-China trade war will have on the South Korean economy varies with different scenarios. The shock to the South Korean economy will depend on how much the Chinese domestic economy is damaged by shrinking Chinese exports to the US, by how much the two countries’ import controls reduce their economic purchasing power and by whether other countries join in an escalating trade war. The South Korean government believes that the trade war’s immediate effect on the economy will not be large. “The intensifying trade dispute between China and the US, which are our two largest export markets, is creating uncertainty in the South Korean economy, which is highly dependent on exports, and increasing concerns in the export industry,” said Minister of Trade, Industry and Energy Paik Un-gyu during a meeting on the morning of July 6 that assessed how the real economy would be impacted by the US-China trade dispute. “Even if the US imposes tariffs on US$34 billion of import products as it has announced it will do today and then imposes tariffs on an additional US$16 billion of products, we believe this will have a limited impact on South Korean exports in the short term,” Paik said. The reason that Seoul has drawn this conclusion is because South Korean exports to the US and China will only be marginally affected by this conflict. South Korea’s current exports to the US and China for the most part consist of completed products that are consumed there. “Exports of intermediate goods and consumer goods to China that are ultimately destined for the US only account for 5 percent of our total exports to China,” said Deputy Minister for Trade Kang Sung-chun. There are even fewer South Korean intermediate goods moving in the opposite direction, passing through the US on their way to China – the amount is not even worth analyzing, researchers say. Given such factors, the Korea Institute for Industrial Economics and Trade (KIET) predicts that this trade dispute will cause exports to the US to fall by just US$60 million (0.09 percent of exports to the US last year), and exports to China by just US$270 million (0.19 percent of exports to China last year). The damage suffered by the entire economy will be just US$800 million, or 0.05 percent of the nominal gross domestic product (GDP) last year. But if the Chinese economy, which is highly dependent on other countries, takes a hit because of falling exports to the US, the impact on the South Korean economy will increase. The Hyundai Research Institute (HRI) released a pessimistic scenario analysis assuming that China fails to export all the goods on which the US is imposing the steep 25-percent tariff (representing US$50 billion, or 10 percent of the US’s imports from China) and that all of South Korea’s related exports to China go away. This analysis found that South Korea’s exports to China decreased by US$28.26 billion. That represents 19.9 percent of South Korea’s US$142.12 billion worth of exports to China last year and 4.9 percent of its US$573.69 billion in total exports last year. In the worst-case scenario, the US and China’s trade war escalates into a global trade war involving Europe and other regions. The HRI based its analysis on the presupposition that an average of a one-point increase in global tariffs leads to a 0.48 percent decrease in countries’ trade volume. If average global tariffs increase from their current level of 4.8 percent to 10 percent, therefore, countries’ average trade volume would plunge by 7.3 percent. This would cause the South Korean economic growth rate to fall by 0.6 points and 158,000 people to lose their jobs. By Choi Ha-yan, staff reporter Please direct comments or questions to [english@hani.co.kr]
